ITAD BIR Ruling No. 154-13

June 14, 2013 ITAD BIR RULING NO. 154-13 Article 10, Philippines-Netherlands Tax Treaty Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 21st Floor, 8767 Paseo de Roxas Makati City Attention: Atty. Juan Ricardo B. Tan Atty. Jayson L. Fernandez Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 25, 2012, on behalf of Hexagon Investments B.V. ("Hexagon") , requesting confirmation that the dividend payments made by Rizal Commercial Banking Corp. ("RCBC") to Hexagon are subject to 10 percent preferential tax rate pursuant to the Convention between the Kingdom of The Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that Hexagon , with address at Schiphol Boulevard 369, 1118 BJ Schiphol, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Director General of the Tax and Customs Administration of the Netherlands dated June 26, 2012; that based on its Articles of Association, Hexagon is company incorporated under the laws of the Netherlands with authorized capital of ninety thousand euros (EUR90,000) and is divided into ninety thousand (90,000) shares with par value of one euro (EUR1.00) each; that Hexagon is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 19, 2012 and that, on the other hand, RCBC is a domestic corporation duly organized and existing under Philippine laws, located at the Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City. It is further represented, as shown in the Secretary's Certificate issued by RCBC dated June 8, 2012, that on March 26, 2012 the Board of Directors of RCBC declared a cash dividend in the amount of Php0.90 per share or approximately Php1.027 billion payable to holders of common class shares and approximately Php368.00 thousand payable to holders of preferred class shares as of the close of the 10th calendar days from the receipt of approval by Bangko Sentral ng Pilipinas; and that the said dividends were remitted to Hexagon by RCBC on July 16, 2012 as evidenced by a Sworn Certification of RCBC dated September 18, 2012. Furthermore, it is represented that as of September 23, 2011, Hexagon holds 171,000,000 common shares, which includes the two (2) common shares held by its nominee directors to qualify them as member of the Board of Directors of RCBC, which represent 15% of the outstanding capital of RCBC; and that these shares were acquired by Hexagon through purchase and subscription as evidenced by Secretary's Certificate issued by RCBC on June 20, 2012. ECTHIA In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty which you invoke, may apply to the instant case. It provides: "Article 10 Dividends 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company, the capital of which is wholly or partly divided into shares, and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Hexagon is a private company in the Netherlands the capital of which is wholly divided into shares, and since Hexagon holds directly 15 percent of the capital of RCBC (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by RCBC to Hexagon are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue